17.1. Primary & subsidized productivity
Without transfers and subsidies the buying power of individual is determined by productivity of their own work only, more exactly by their employers will to reward their productivity through fair wage compared to profit margin. This is individual´s Primary productivity.
What does it mean and how is it determined ?
Imagine a seamstress in a garment factory who makes T-shirts. Given her work output, she is able to earn say 200$ per month. This salary is determined by amount of money the customers are willing to pay for 1 T-shirt (say 10$) and planned profit of company. She cannot be paid more, as with 400$ / month the T-shirt would cost 20$ and the company would not sell a single one because of competition. If we, the customers would be able and willing to pay 30$, than her salary could go towards
3 x 200 = 600$ and she would be earning 3 times more.
So her wage is more or less determined by our view of prices as we are willing to accept them and the prevailing offer of companies providing these products.
As we see a T-shirt a basic necessity, we would not accept higher prices (or, if such prices existed the new competitors would utilize ease of production and start producing the same products cheaper and so quickly erasing the price gap.)
As a result of these market constrains, the seamstress, who is doing necessary and useful work is deemed to poverty. Her wage will always be low, and as a consequence her buying power will logically be also very low. And the same applies to many needed professions: grocery producers are not able to earn more than we are willing to pay for carrots and lettuce, hairdressers cannot make more than we are willing to pay for a haircut and so on.
The more we see the product as a basic necessity, the less we want to pay for it and so the pressure to prices is strongest. This leads to a paradox, where people providing the most needed products and services are the poorest.
But this is not their fault at all: we need their work !
They did not commit any crime, they did not make any mistake by not having a higher education.
( even if they all would get their PhD they would still be low paid in their present professions as society as a whole cannot do without these jobs, and so we would have PhD seamstresses, grocery producers but with the same low wages)
We cannot survive without their products and services, we just have to, because of monetary pressures always seek the cheapest option and so push them into poverty, determined by their Primary productivity, driven by amount of human labor needed and our perception of prices as they should be ( Or, as we want them to be. If we were willing to pay 10$ for loaf of bread, the bakers would be definitely rich, but are we willing ?)
But the fact, that their primary productivity is low has also impact of how many higher productivity items, services the society is able to generate, meaning to sell.
If seamstress is earning only 200$ / month, she is not able to buy a car, which the carmaker is able to produce by hundreds of thousands / month and his production capacity has nothing to do with that of seamstress. She is not able to go to wellness saloon, which has unused capacity well capable and eager to handle few more clients. She is not able to enjoy many of the pleasures of life that are on offer at abundance solely because her wage is low, while these other companies are very well able to satisfy additional demand, as their production capacity is determined by totally different factors.
The production capacities of industries are separate parameters from each other, and have very little to do with each industry primary productivity, determined by our perception of prices.
However, their real production output (and hence profit) is heavily influenced by primary productivity of these other industries and from it stemming available buying power.
So for all other companies the low wages of low primary productivity jobs means reduction of available buying power coming from these low paid (employees = customers) which is bringing their sales and profits down to the level determined by these lower aggregate productivity companies while there is indeed no direct link between them.
The social aspect is even more significant: people, who are doing their honest, useful work are UNNECESSARILY poor, often not able to afford common products and services the society is able to provide to all, irrespective of profession.
There is also strong and grossly misleading perception that honest work does not pay, and only speculators are capable to prosper. The implications of such prevailing views are having devastating consequences on society as a whole.
Therefore, comes the concept of Subsidized productivity.
Subsidized productivity consist from Primary productivity + subsidy !
What is does is that it removes the constrains of primary productivity, otherwise uncrossable.
You cannot increase the buying power of lower Primary productivity industries by simply increasing their wages ( say union actions, administrative increase of minimal wages).
If wages would go up as a result of the above, it would mean only increase of prices of products generated by these industries as any increase would be incorporated to the final price.
Subsequently, the other employees seeing the rise of price of really needed goods would demand similar pay rises from their employers. As they would get it, the final outcome would be just pure inflation and the lower productivity industry employees would see no increase in their buying power and living standards at all.
The only way forward is subsidizing, as this does not increase the prices. With subsidies, the price level is preserved, so increased nominal wages are having real impact on higher buying power of these originally lower primary productivity industries workers.As as result of their increased buying power, other industries are getting the boost as well.
The final result is transformation of the standard ladder principle, where poor are destined to stay poor:
into a more socially just ZIPP model:
So to sum up:
If company A can generate for its workers, given its productivity, wages at the level of X, this does not mean that company B, dependent on these wages as a source of their sales is not able to physically generate goods and services for Y, while Y>X. Company B is so limited in its production to sales, corresponding to X, while its real production capacity can be much higher.
These limits lead to lower production as potential and so lower employment, sales, profits and taxes. The resulting prices of B could be also much lower given the higher volume generated by subsidized wages(transformed to sales) against standard volume based on standard(unsubsidized) wages based just on original productivity of company A.
This subsidizing of buying power goes through the whole economic spectrum. Without transfers, certain goods and services are not available for the whole groups of citizens. At the other hand, whole industries are suffering if available buying power is below their potential production capacity.
